Arbitration- Charterers claim damages for hold's rejection

Summary prepared by Prokopios Krikris, FCIArb, Arbitrator

Author's comment: The recurring issues in disputes concerning the rejection of holds include: the status of surveyors (i.e., whether they are official or independent) so that to trigger the "holds condition" clause, the construction of net or period off-hire clauses (where wording is critical), evidential questions (such as whether a rejection was unreasonable or whether appropriate test methods were applied), delays in arranging re-inspections and the resulting time loss, and whether the holds condition clause operates as a complete code or whether Charterers retain a parallel right to claim damages.

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In this LMAA Arbitration, the vessel arrived at the loading port, where the intended berth was occupied. At that stage, the Sub-Charterers’ agents ordered a pre-inspection of the holds at the anchorage. The Charterers’ surveyors rejected the holds during this pre-inspection, citing the presence of residues from previous cargoes. Photographic evidence was produced in support of these allegations.

The Sub-Charterers consequently rejected the initial Notice of Readiness when it was tendered a few days earlier. The vessel eventually berthed several days later, whereupon the holds were inspected and passed by surveyors acting on behalf of the terminal, the Charterers, and the Sub-Charterers.

Charterers subsequently deducted from the final hire statement an additional amount equivalent to despatch payable under the voyage sub-charter. Their position was that Owners had breached the charterparty, thereby invalidating the initial NOR, on the basis that the vessel was not ready when the NOR was tendered. This, they argued, resulted in increased despatch under the sub-charter.

The tribunal was therefore required to determine the condition of the holds at the relevant time and the consequences for both Owners and Charterers.

The initial pre-inspection lasted approximately two hours and was conducted using the “glove-test” method. Owners contended that this method was not representative of the true condition of the holds, that the surveyors were not independent (having been appointed by the Sub-Charterers), and that their report was not binding. Owners further relied on the holds condition clause, submitting that the vessel would not be off-hire if cargo had not otherwise been prevented from being loaded. As the berth was occupied, no time was lost, and Charterers had no right to make deductions from hire. According to the Owners, Charterers’ sole remedy would have been to place the vessel off-hire, and in any event, the damages claimed were too remote and unforeseeable.

Charterers, on the other hand, argued that at the time the NOR was tendered, the vessel was not in fact ready to receive the intended cargo as required under the charterparty provision that “upon arrival at the first loading port the ship will be ready to receive….”. They contended that Owners were aware of the nature of the cargo to be loaded and of the strict cleanliness requirements, and therefore should have ensured that the holds were prepared en route to the loading port. In addition, they noted that the Master had signed the pre-inspection report without qualification, and the Owners subsequently arranged cleaning of the holds at their own expense. Charterers also adduced expert evidence which supported the conclusion that the vessel was not “grain clean” at the relevant time.

Much of the discussion focused on London Arbitration 24/16 [Editors' note: which was distinguished as it also happened in other unreported cases].. The arbitrator considered the expert evidence, together with the contemporaneous reports, and concluded that the vessel’s holds were not in a suitable condition when the NOR was tendered. As no time was lost due to berth congestion, the arbitrator did not need to decide whether the pre-inspection survey itself was sufficient to engage the holds condition clause. However, the arbitrator found that it was reasonably foreseeable that a failure to arrive at the load port with grain clean holds, and/or a failure to tender a valid NOR, would result in time not counting under a sub-charter and/or affecting the berthing schedule. This, the arbitrator noted, reflected normal industry practice.

The arbitrator ultimately held that Charterers were entitled to claim damages for Owners’ breach of lines 21–22. Nothing in the terms of the contract excluded the Charterers’ right to damages in addition to off-hire, and such an exclusion would have required clear and express wording. Accordingly, Charterers were entitled to recover damages corresponding to the increased despatch liability incurred under the sub-charterparty.

Editor’s note: In other cases, Charterers have relied on London Arbitration 4/10, where they sought damages equivalent to the demurrage they would have earned under the sub-charter but for the vessel’s defective condition, together with the despatch they actually paid following the vessel’s return to the loading port and the tendering of a second NOR. Owners argued that such damages were too remote, contending that they had no knowledge of the sub-charter or its laytime provisions. The tribunal, however, upheld the Charterers’ claim, finding that “loss and liability was manifestly caused by the Owners’ breach; and the financial consequences were not too remote.”

The use of “pre-inspection” arrangements has been a recurring source of dispute in such cases. This position was illustrated in London Arbitration 9/22.